In a previous article related to Estée Lauder (EL), a collar position was considered for the company as the company's earnings results were soon to be released and with its expensive P/E ratio, any bad news from the company could have resulted in drop in the company's stock price.
A long stock investment in Estée Lauder at the time of the previous article would now be down about 0.7%, but an investment in the collar position would be profitable by about 1.7%, as the put and call options would have expired worthless at stock expiration in February.
In Lauder's most recent Q2 2012 earnings conference call held on February 3, 2012, the company experienced strong growth across all geographies, categories and brands. Performance in Asia/Pacific region experienced the strongest growth followed by Latin America. The company experienced some softening or slowing in the European region.
Additionally, the company is now using iPads for the company's "Service as You Like It" strategy and is experiencing 3% greater sales at counters using the iPads.
The company plans to ramp up advertising spending and is planning on implementing the advertising strategy it uses for its skin care products for its makeup products as well. The Clinique brand is the main focus in the U.S. market segment, the Estée Lauder brand is the main focus in the Chinese market and the M-A-C brand is the major focus in Brazil.
The company is expecting the Euro to weaken versus the U.S. dollar in the second half of the year, which could result in lower results for the European market segment. Additionally, the company is expecting the growth in China to moderate slightly.
Lauder's stock price has been in a trading range between $52 and $60 for the last four months as shown below:
With Lauder's slower growth issues in China and weakening Euro in Europe, the stock could continue in a trading range until there is more clarity regarding Europe and China.
Since the company's next earnings report is several months out, a covered call position will be considered for Estée Lauder, as another collar position for protection is most likely not needed. The covered call enables an investor to potentially generate income while a stock is stuck in a trading range. A covered call may be entered by selling a call option against an existing or purchased stock.
Using PowerOptions tools, an attractive covered call for March was not found, but a position for April was found with a potential return of 2.1% (16.3% annualized). The specific call option to sell is the 2012 April 60 at $1.20. A profit/loss graph for one contract of the covered call is shown below:
As a bonus, if the price of the stock is greater than or equal to the $60 strike price of the call option at expiration in April, the position will return 4.7%. Additionally, if the price of the stock increases to the $65 range, the position may be rolled in order to realize additional potential income.